Salary benchmarking is the process of comparing what an organization pays for a role against what the market actually pays for the same work, so that pay decisions are grounded in evidence rather than guesswork or internal precedent. In a talent market where candidates can check market rates before a single interview happens, a company that benchmarks well can hire faster and retain more of its best people. This guide walks through how to actually implement salary benchmarking as a repeatable process, not a one-off project, building on the foundations of compensation strategy covered elsewhere on this blog.

Why Benchmarking Matters Before You Start

Step One: Define Your Compensation Philosophy

Step Two: Define Your Competitive Set

Next, define who the organization is actually competing against for talent: which companies, in which locations, at what size and funding stage. A seed-stage startup in Lisbon and a 2,000-person multinational hiring in Lisbon are not competing for the same candidates, even if they are hiring for the same job title, so the competitive set has to reflect the labor market a company genuinely competes in, not an aspirational one.

Step Three: Choose the Right Data Sources

Running the Benchmarking Process

With philosophy, competitive set, and data sources in place, the actual benchmarking process follows three repeatable steps:

A Worked Example: Benchmarking a Software Developer Role

To see how this works in practice, consider a fictional company, “NovaCode,” an IT firm with 500 employees and over €20M raised, hiring software developers out of an office in Milan. NovaCode currently pays €51,000 for a senior software developer with five years of experience and wants to know how that compares to companies of similar size, sector, and funding competing for the same talent.

Their competitive set is defined using four filters: location (Milan), company size (500+ employees), sector (IT), and funding received (€20M+). Applying those filters to current market data produces the following benchmark for a Software Developer role.

Once the new target range is set, NovaCode can use it both to set offers for new hires and to identify which current employees are now paid below the range, which is exactly the kind of decision that benefits from the kind of structured, criteria-based process described in compensation governance best practice rather than ad hoc manager judgment.

Why Annual Benchmarking Cycles Are No Longer Enough

Benchmarking Under the EU Pay Transparency Directive

Benchmarking has also become a compliance issue, not just a competitiveness one. Under the Pay Transparency Directive (Directive (EU) 2023/970), employers operating in the EU need to be able to show that pay differences between employees doing comparable work are based on objective, gender-neutral criteria. A documented benchmarking methodology, applied consistently across roles and locations, gives HR and compensation teams the evidence trail they need if a pay decision is ever questioned internally or by a regulator.

Common Pitfalls to Avoid

Frequently Asked Questions

What is the first step in implementing salary benchmarking?

The first step is defining a compensation philosophy: deciding whether the organization wants to lead, match, or lag the market for a given role or role family. Every later benchmarking decision is interpreted against that philosophy, so it needs to be set before data collection begins.

How often should a company re-run salary benchmarking?

Annual benchmarking is no longer frequent enough for fast-moving roles like software engineering. Companies using continuously updated data sources can review and adjust pay ranges as market conditions shift, rather than waiting for a once-a-year cycle that may already be outdated.

What is the difference between the market median and the market percentile a company targets?

The market median, or 50th percentile, is simply the midpoint of what the market pays for a role. The percentile a company targets is a strategic choice: targeting the 75th percentile means deliberately paying above most competitors to win talent, while targeting a lower percentile means accepting a less competitive position, often in exchange for stronger benefits or equity elsewhere in the package.

How does the EU Pay Transparency Directive affect salary benchmarking?

It requires employers to be able to justify pay differences between employees doing comparable work using objective, gender-neutral criteria. A documented, consistently applied benchmarking methodology provides exactly this kind of evidence trail, making it a compliance tool as well as a competitiveness one.

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